Sub-advising is a process by which one investment advisory (IA) firm manages the investment operations for another IA firm. Sub-advisory firms are firms that specialize in money management, or portfolio management.
There are several types of IA firms that can benefit from sub-advising services. Large investment advisory firms whose investments are managed entirely in-house are great candidates for sub-advising. In-house investment management within a large firm can be overly influenced by the firm’s perspective, culture, initiatives, etc. By outsourcing some, or all of the investment management to one, or multiple sub-advisors, a firm can realize the benefit of having a more diverse perspective on the markets. When a firm diversifies the way in which their investments are managed (i.e. moving to a multi-manager approach), that firm’s investments will be better positioned to maintain AUM through wild swings in global markets. This benefits the firm’s clients, as well as the advisors who are paid based on their clients’ AUM.
Small IA firms that need to focus on prospecting to grow AUM are other great sub-advising candidates. Small firms that are looking to grow their AUM need to focus on prospecting in order to grow new clients and extend their referral base. By teaming up with a sub-advisor, or several sub-advisors, a small firm can free up significant amounts of time for marketing and sales initiatives.
IA firms that focus on planning services, and do not specialize in investment management should consider outsourcing their investment management operations. A financial planning firm that retains AUM, but focuses primarily on advising and planning services can benefit greatly from sub-advisory services. A firm of this nature is very knowledgeable of “big picture” issues, tax laws, financial products, insurance products, etc. However, they typically do not specialize in money management, or portfolio management. The financial planning firm will help a client determine what portion of their income they need to invest each year, and can suggest what percentage return they need to generate each year. The sub-advisor’s job is to properly invest the client’s assets in order to realize the needed returns each year. In this case, a sub-advisor enables the financial planning firm to offer investment management services a part of their client proposition.
Firms that specialize in only one type of investment strategy can benefit from outsourcing some of their investment management. By adding a sub-advisor, a firm can immediately diversify their investment options they provide their clients. A firm may be an expert in fixed-income securities, but may lack the technical knowledge to invest in equities. Teaming up with a sub-advisor will solve this problem. By hiring a sub-advisor, this firm can diversify not only their product offering, but can also diversify the assets they hold under management.
Sub-advising is a growing trend in the investment management and financial planning industries. For many firms, it is a great way to add immediate value to their product and service offerings.